Amid the current challenging economic times, UK smaller companies can still create a platform for long-term future growth, according to Ken Wotton, portfolio manager at Strategic Equity Capital.
Wotton noted, during a recent webinar hosted by AIC, that investing in smaller UK companies during an economic downturn presented challenges due to the uncertain operating environment those companies face.
“However, challenging economic times are when the best businesses and best management teams can use agility and effective execution to take market share and create the platform for long-term future growth,” Wotton added.
“This means investments made in the current environment have the potential to be long-term winners and drive very attractive long-term investment returns.”
George Ensor, Portfolio Manager of River and Mercantile UK Micro Cap added, that UK small caps trading at a significantly lower relative valuation to the wider UK market than they did in the financial crisis – created a “phenomenal investment opportunity” for the next three to five years.”
He said: “UK smaller companies gained 500 per cent – an annualised return of 15 per cent – from March 2009 to September 2021, doubling the total return of the wider UK market. The prevailing, extremely negative positioning and sentiment only enhances the current opportunity.”
Ensor explained that UK smaller companies had experienced net downgrades this year, albeit not the big earnings recession that many had expected.
Downgrades have been particularly prevalent in the more interest rate-sensitive sectors – real estate, housebuilding, consumer discretionary – and debt-funded companies which have experienced a rapid increase in their cost of finance.
"Earnings in energy, healthcare, financials and tech have held up better and, with the exception of energy, we are overweight these sectors," Ensor added.
